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When markets fail, build new markets

The fundamental premise of capitalism is that self-interest channeled through markets creates optimal outcomes. Yet our current system frequently fails to deliver on this promise. Inequality grows, harmful activities remain profitable, and money continues to warp both law and politics.

What if the solution isn’t abandoning capitalism, but extending market mechanisms to areas currently dominated by power imbalances?

Litigation Finance: Democratizing Justice

Justice, in theory, should be blind. In practice, it often sees your bank account quite clearly.

Litigation finance emerged as a market solution to a market failure. When individuals or small businesses have legitimate legal claims against well-resourced defendants, they often cannot afford to pursue justice. Traditional contingency arrangements help, but don’t cover the full costs of complex litigation.

Here’s how litigation finance works:

• Third-party investors fund lawsuits they believe have merit
• If the case succeeds, investors receive a portion of the settlement or damages
• If the case fails, investors lose their investment

This creates a market for justice where even those with limited resources can hold powerful entities accountable. Companies like Burford Capital, Omni Bridgeway, and newer platforms like LexShares and Legalist are expanding access to this model.

The social impact has been significant:

• Small businesses can pursue claims against larger competitors who engage in anti-competitive practices¹
• Communities affected by environmental damage can fund lawsuits against corporate polluters²
• Consumers harmed by predatory practices can collectively mount effective legal challenges³

Empirical research supports these benefits, with funded cases showing higher settlement rates and recovery amounts compared to unfunded litigation.⁴

The system isn’t perfect—investors naturally prefer cases with high potential returns and clear paths to victory. But it illustrates how market mechanisms can help level playing fields previously tilted by financial power.

Tax Evasion Finance: Making Enforcement Profitable

While litigation finance helps private parties enforce their rights, what about the enforcement of public obligations? Tax evasion directly deprives societies of resources needed for public goods. The global tax gap—the difference between taxes owed and taxes collected—is estimated at $600 billion annually in the U.S. alone⁵ and trillions worldwide.

A Market-Based Tax Enforcement Model

The IRS Whistleblower Program offers a precedent, paying informants up to 30% of collected proceeds when they report tax evasion. However, a more comprehensive “Tax Evasion Finance” model could expand this approach:

How It Might Work

• Investment firms would fund specialized tax investigation teams
• These teams would identify and document sophisticated tax evasion schemes, particularly those used by ultra-high-net-worth individuals and multinational corporations
• Evidence packages would be presented to tax authorities
• Upon successful recovery, the firm would receive a percentage of the collected tax revenue

This isn’t merely theoretical. In 2019, a whistleblower received $57.6 million for providing information about offshore tax evasion schemes by Swiss banks—demonstrating the potential scale of returns in this market.⁶

Key Advantages

1. Expertise Concentration: Private firms could develop specialized knowledge of complex avoidance structures that resource-constrained tax authorities struggle to address
2. Global Reach: Unlike national tax agencies, private firms could operate across jurisdictions to track international evasion strategies
3. Technology Investment: The profit incentive would drive development of advanced analytics to identify patterns invisible to conventional enforcement

Implementation Considerations

• Treaty Support: International tax information exchange agreements would need amendments to include authorized private entities
• Safeguards Against Harassment: Protections for taxpayers against unfounded investigations
• Proportional Incentives: Higher recovery percentages for complex schemes that would otherwise likely escape detection

A notable precedent exists in the U.S. False Claims Act’s qui tam provisions⁷, which allow private individuals to sue on behalf of the government against fraudulent contractors and receive a portion of recoveries. Tax evasion finance would extend this principle to the realm of tax enforcement.

Parallel Systems: Private Enforcement of Private Rights and Public Obligations

Litigation finance and tax evasion finance represent two sides of the same coin: market-based enforcement mechanisms that address power imbalances. The first helps private parties enforce their legal rights; the second helps the public enforce tax obligations. Both create financial incentives to counterbalance the advantages that wealth typically provides in our legal and regulatory systems.

Together, they illustrate a powerful principle: when conventional enforcement mechanisms falter against concentrated wealth and power, creating markets for enforcement can help restore balance.

Beyond the Pair: Other Potential Enforcement Markets

The principles that make litigation finance and tax evasion finance compelling could extend to other domains:

Environmental Compliance Finance

Private firms could identify and document environmental regulation violations, particularly those affecting communities without resources to pursue claims themselves. Returns would be tied to penalties assessed or remediation costs recovered.

Environmental citizen suits already provide a limited version of this model, allowing private parties to enforce environmental laws when agencies fail to act.⁸ A finance-backed expansion would add resources and expertise to this established framework.

Antitrust Enforcement Finance

Monopolistic practices and market manipulation often go unchallenged due to the resources required for complex economic analysis. Private investment in antitrust enforcement could fund the expertise needed to identify and document anti-competitive behavior.

The European Commission’s competition authority already offers financial rewards to whistleblowers who report cartel activity.⁹ A more comprehensive antitrust finance model would extend this to fund thorough investigations by specialized firms.

Market Solutions to Systemic Problems

These models illustrate how capitalism’s tools can address capitalism’s failures. By creating financial incentives aligned with public good, we can harness self-interest to counteract the negative externalities of our economic system.

The concept of the “private attorney general” has a long history in American law, though its effectiveness has waxed and waned over time.¹⁰ Modern financial markets offer new possibilities for reinvigorating this approach.

Addressing Core Issues

1. Inequality: Litigation finance already helps redistribute power by enabling valid claims regardless of plaintiff resources. Tax evasion finance would further level playing fields by ensuring the wealthy cannot opt out of societal obligations through complex avoidance schemes.

2. Profitable Harm: When harmful activities (pollution, fraud, tax evasion) can be more effectively prosecuted, their profitability diminishes. Market mechanisms for enforcement can scale more effectively than limited government resources alone.

3. Money’s Political Power: As legal accountability becomes more accessible regardless of wealth, money’s ability to shield wrongdoing diminishes. This creates a counterweight to the political influence money currently buys.

Limitations and Concerns

These market-based solutions aren’t panaceas. Legitimate concerns include:

• Cherry-picking: Investors will naturally prefer “profitable justice” over comprehensive enforcement
• Due Process: Private enforcement incentives must not override rights protections
• Regulatory Capture: Systems must resist becoming tools for competitive harassment
• Distributional Effects: Benefits must reach beyond high-value commercial cases—though research suggests litigation finance is already expanding access across demographic groups¹¹

The Path Forward

Markets fail when power concentrates and externalities go unaddressed. Our response needn’t be abandoning markets, but extending them to areas where traditional enforcement struggles.

By developing markets for justice and compliance, we create systemic counterforces to wealth’s distorting influence. The cure for capitalism’s failures may indeed be more capitalism—but deliberately designed to create markets where power imbalances currently prevail.

What other areas of social, environmental, and economic harm might benefit from similar market mechanisms? The potential for innovation in “justice markets” has only begun to be explored.

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